INTRODUCTION. The Texas Department of Insurance, Division of Workers' Compensation (division) proposes to amend 28 Texas Administrative Code (TAC) §134.500, Definitions; and proposes conforming amendments to 28 TAC §134.530, Requirements for Use of the Closed Formulary for Claims Not Subject to Certified Networks; and 28 TAC §134.540, Requirements for Use of the Closed Formulary for Claims Subject to Certified Networks. The proposed changes amend the definition of the closed formulary to exclude any prescription drug created through compounding, and to require preauthorization for all prescription drugs created through compounding.

An informal working draft of the rule text was published on the division's website on June 16, 2017, and the division received 22 comments. If adopted, these amendments become effective July 1, 2018.

BACKGROUND AND PURPOSE. House Bill 7 (HB 7), enacted by the 79th Texas Legislature, Regular Session, amended Labor Code §408.028, Pharmaceutical Services, to require that the commissioner of workers' compensation adopt a closed formulary. After extensive collaboration with system participants, including medical providers and insurance carriers, the commissioner adopted a series of rules to implement the closed formulary and transition injured employees' claims to the closed formulary.

Implementation of the closed formulary has had a significant effect on the use of pharmaceuticals in the Texas workers' compensation system. Cost for pharmaceuticals has decreased significantly since the initial applicability of the closed formulary. Likewise, the use of opioids and other potentially addictive drugs has decreased dramatically. These changes have been monitored through a series of reports issued by the Texas Department of Insurance Workers' Compensation Research and Evaluation Group (REG).

From 2010 to 2015, total payments for all prescriptions decreased by 38%. In contrast, total payments for compounded drugs increased by 98% over the same time period.

Pharmacy services for new claims (by injury year):

Between Fiscal Injury Year (FIY) 2011 (pre-formulary) and FIY 2012 (post-formulary), the number of injured employees receiving N-drugs (drugs identified with a status of "N" in the current edition of the Official Disability Guidelines Treatment in Workers' Comp (ODG) / Appendix A, ODG Workers' Compensation Drug Formulary, and any updates) decreased by 67%.

N-drug costs decreased by 78%, and N-drug costs as a percentage of all drug costs decreased by 74% (from 20% of total to 5% of total).

The average number of N-drug prescriptions per claim decreased by 32%.

The number of N-drug prescriptions decreased by more than 70% across all drug groups.

Pharmacy services for all claims (new and legacy claims by service year):

Between Fiscal Service Year (FSY) 2011 (pre-formulary) and FSY 2014 (post-formulary for legacy claims), the number of injured employees receiving N-drugs decreased by 83%.

The number of N-drug prescriptions decreased by 85%.

N-drug costs decreased by 80%. The number of N-drug prescriptions decreased by more than 80% in all drug groups. Costs decreased by more than 70% in all drug groups.

As a result of concerns expressed by system participants and the division's obligation to monitor the closed formulary, generally, analysis of compounded drug activity was undertaken based on pharmacy data collected by the division. The following observations, presented by the division to the Texas House of Representatives Business and Industry Committee, are noteworthy.

Compounded drug payments increased from $5.87 million (4% of total prescription reimbursement) in calendar year (CY) 2010 to $11.6 million (12% of total prescription reimbursement) in CY 2015.

Pharmacy medical billing data indicates a 14% increase in the number of compounded drugs paid from CY 2010 to CY 2014.

Reimbursement per compounded drug increased 141% from CY 2010 to CY 2015 ($316 to $760).

From FY 2010 to FY 2014, ingredient costs for a selected group of ten commonly compounded drugs increased between 82% and 1,474%.

Per the division's analysis, as the use of compounded drugs for work-related injuries has increased over the last five years, the cost of compounded drugs as a percentage of total pharmacy costs has more than doubled.

In response to these findings, the division initiated a plan-based audit of several physicians prescribing compounded drugs in the system. The audit was conducted by the division's Office of the Medical Advisor.

Under Labor Code §408.021, Entitlement to Medical Benefits, an injured employee who sustains a compensable injury is entitled to all health care reasonably required by the nature of the injury as and when needed. More specifically, an injured employee is entitled to health care that cures or relieves the effects naturally resulting from the compensable injury; promotes recovery; or enhances the ability of the employee to return to or retain employment.

While entitlement to healthcare does extend to, and include, compounded drugs, compounded drugs are not recommended as a first-line therapy by the current edition of the division's adopted treatment guidelines, the Official Disability Guidelines-Treatment in Workers' Comp (ODG), and the medical necessity and efficacy of compounded drugs is not well-established per evidence-based medicine standards.

The purpose of the Compound Medications Plan-Based Audit was to promote the delivery of quality health care in a cost-effective manner, including protection of injured employee safety; to ensure that doctors adhere to the ODG / Appendix A, ODG Workers' Compensation Drug Formulary and medically-accepted standards of care for prescribing compounded drugs; and to determine the appropriateness of medical decision-making related to the prescription of compounded drugs by doctors or those acting under their supervision. The division found that prescribing doctors selected for the audit generally did not demonstrate or document the efficacy or medical necessity of the prescribed compounded drugs dispensed to injured employees.

The proposed amendments are necessary to ensure that compounded drugs are prescribed to injured employees only when reasonably required and medically necessary to treat the injured employee's injury. Preauthorization of compounded drug prescriptions assures that the prescription comports with the commissioner's adopted treatment guidelines or the network's treatment guidelines and other treatment standards outlined in the Insurance Code and Texas Administrative Code. Preauthorization may also apply downward pressure on compounded drug system costs because only compounded drugs determined to be medically necessary would be dispensed to injured employees. Of considerable importance, these rule amendments will clarify for stakeholders the division's requirements regarding compounded drug in the closed formulary.

Currently, §134.530, Requirements for Use of the Closed Formulary for Claims Not Subject to Certified Networks, and §134.540, Requirements for Use of the Closed Formulary for Claims Subject to Certified Networks, require preauthorization for "any compound that contains a drug identified with a status of "N" in the current edition of the ODG Treatment in Workers' Comp (ODG) / Appendix A, ODG Workers' Compensation Drug Formulary, and any updates." The division does not currently require preauthorization for compounded drugs that do not contain an "N" drug. The proposed rule amendments will require preauthorization for all compounded drugs prior to being dispensed, including compounded drugs that do not contain an "N" drug.

The most efficient means for requiring preauthorization is to amend the definition of closed formulary contained in §134.500, Definitions, to exclude not only compounded drugs that contain N-status drugs, but all compounded drugs. By making conforming changes to §§134.530 and 134.540, all compounded drugs will require preauthorization prior to dispensing.

Therefore, the division proposes to amend §134.500 to exclude from the closed formulary "any prescription drug created through compounding." The division proposes using the phrase "any prescription drug created through compounding" rather than "compound drug" or "compound" because "compounding" is a defined term. In §134.500, "compounding" is defined as the preparation, mixing, assembling, packaging, or labeling of a drug or device under a number of specified circumstances. By contrast, "compound drug" and "compound" are not defined terms in the Texas Workers Compensation Act or division rules and using them would produce more confusion than clarity within the regulated community. The phrase "compounded drug" as used in this preamble is shorthand for "any prescription drug created through compounding" and is the term used in the REG's most recent study on the topic.

Section 134.530(b)(1) and §134.540(b) require preauthorization for drugs excluded from the closed formulary. Therefore, the effect of amending the definition of the closed formulary to exclude any prescription drug created through compounding is to require preauthorization of these drugs before they are dispensed. This proposed change does not prohibit the use of compounded drugs for injured employees when medically necessary; however, it does require that the medical necessity be determined prior to dispensing these drugs.

Prescriptions for compounded drugs not requiring preauthorization that are written before July 1, 2018, and refills for those prescriptions, will not be impacted by this rule change. However, any prescription drug created through compounding will require preauthorization when both prescribed and dispensed on or after July 1, 2018. The delayed applicability date should allow sufficient time for the prescribing doctor, injured employee, and insurance carrier to revisit and review an injured employee's need for specific prescription compounded drugs. As compounded drugs transition to the preauthorization process, the likelihood of unreasonable risk of medical emergency resulting from an adverse determination is low. However, an unreasonable risk of medical emergency triggered by an adverse determination of a preauthorization request for a previously prescribed and dispensed compounded drug can be addressed promptly through the process outlined in §134.550, Medical Interlocutory Order.

Mr. Matthew Zurek, Executive Deputy Commissioner for Health Care Management, has determined that for each year of the first five years the proposed amendments will be in effect, there will be no fiscal impact to state or local governments as a result of enforcing or administering the proposal. There will be no measurable effect on local employment or the local economy as a result of the proposed new sections. Local government and state government as a covered regulated entity will be impacted in the same manner as persons required to comply with the proposed amendments, as described below.

Mr. Zurek has determined that for each year of the first five years the proposed amendments are in effect, there will be a number of public benefits. The public benefits anticipated as a result of the proposed amendments include greater uniformity and cost certainty in the prescribing and dispensing of compounded drugs to injured employees. Additionally, the division anticipates the proposed amendments will facilitate the appropriate use of compounded drugs in the Texas workers' compensation system, resulting in improved quality of care, improved return-to-work outcomes, and fewer disputes.

These proposed amendments will help improve the quality of medical care provided to injured employees throughout the system. When compounded drugs that are not included in the pharmacy closed formulary are prescribed, injured employees can be assured that the medical necessity of the prescribed drug has been reviewed. By adding this medical review check point, the safe use of the compounded drug increases because the injured employee's use of the prescription is subject to an additional level of medical necessity review. Collaboration between the pharmacist, prescribing doctor, and the utilization review agent in such situations assures the best interests of the injured employee. Finally, preauthorization of compounded drugs should serve to encourage full consideration of alternative pharmaceutical options presumed reasonable under the division's and certified networks' treatment guidelines, as well as compliance with these treatment guidelines.

This proposal may affect the following system participants: 1) injured employees; 2) employers; 3) health care providers (including prescribing physicians and compounding pharmacies); 4) insurance carriers; 5) utilization review agents; and 6) independent review organizations (IROs).

Injured employees should benefit from a system that provides consistent preauthorization requirements for compounded drugs. An added benefit for the injured employee is the certainty of medical necessity provided through the preauthorization process. Additionally, the formulary continues to offer the injured employee access to the complete spectrum of reasonable and necessary pharmaceuticals. Physicians will not be prohibited from prescribing compounded drugs when the prescriber demonstrates that compounded drugs are a medically necessary treatment option for an injured employee. Injured employees benefit when they receive timely, appropriate care which facilitates return to work.

Employers also benefit when injured employees receive timely, appropriate care which facilitates return to work, and may realize indirect benefits through decreased premiums as a result of decreased medical benefit and indemnity costs through improved delivery of health care.

Prescribing doctors should benefit from adoption of the proposed amendments and the clarification of preauthorization requirements in the Texas workers' compensation system. This clarity allows prescribing doctors to better coordinate the needs of injured employees, with the dispensing of necessary drugs, and management of the prescribing doctor's role in the preauthorization process. Though there is a potential for new administrative costs related to the preauthorization process, the amount of this cost is dependent upon the specific business practices of the physician's office. Currently, any drug that does not require preauthorization is subject to retrospective utilization review. Thus, potential costs related to the preauthorization process should be offset to the extent that physicians were previously required to provide statements of medical necessity in the retrospective review process. In either instance, prescribing doctors would be providing information and rationale to the utilization review agent in the manner outlined in Chapter 10, Subchapter F and §§134.500, 134.520, 134.530, 134.540 and 134.600 of this title.

Pharmacists should benefit from the proposed amendment. Currently, pharmacists are uncertain as to preauthorization requirements for compounded drugs and the applicability of treatment guideline recommendations. The proposed amendment clarifies that compounded drugs are excluded from the pharmacy closed formulary so that preauthorization is required. This clarification provides administrative certainty as to which drugs require preauthorization, and when. Further, pharmacists will benefit by the avoidance of any future litigation costs relating to compounded drugs and their potential investigational or experimental status.

Clear preauthorization requirements will decrease the potential of reimbursement denials for drugs excluded from the pharmacy closed formulary. Data from the division's medical billing database shows that in 2016, approximately 25 percent of compounded drugs billed were denied by the insurance carrier retrospectively. Pharmacy charges for these denied prescriptions totaled approximately $6,000,000. During 2016, compounded drugs were reimbursed at approximately 83% of billed charges. Therefore, based on the 2016 reimbursement rate, pharmacies' loss of reimbursement for these prescriptions was estimated at $5,000,000. The categorical preauthorization requirement for compounded drugs should eliminate this economic loss because issues regarding the medical necessity of a compounded drug will be addressed before the compounded drug is dispensed. However, pharmacies may incur some administrative costs as a result of the proposed amendments. There is a potential for additional administrative costs related to the preauthorization process for pharmacies when they submit preauthorization requests for compounded drugs that did not previously require preauthorization. The amount of this cost is dependent upon the specific business practices of the pharmacy.

Additionally, health care providers (including prescribing doctors and pharmacists) currently pay in advance for IRO reviews regarding medical necessity disputes involving retrospective denials of health care; however, insurance carriers pay for IRO reviews related to preauthorization. This rule amendment, requiring preauthorization of compounded drugs, should eliminate the need for retrospective medical necessity dispute requests involving compounded drugs and, thus, the health care provider's responsibility for their current costs.

Health care providers, other than pharmacists or prescribing doctors, are unlikely to see any additional costs, and benefits would likely be indirect and realized as overall system improvements.

Insurance carriers should benefit from additional administrative clarity regarding preauthorization requirements for pharmaceuticals. Once a compounded drug requiring preauthorization is approved, no dispute exists regarding the medical necessity of the approved drug. In addition, carriers may realize cost savings if this change to the pharmacy closed formulary alters prescribing patterns so that over-utilized compounded drugs not preferred as a first-line treatment are passed over by prescribing physicians in favor of generally less expensive drugs included in the pharmacy closed formulary. Further, insurance carriers will benefit by the avoidance of any future litigation costs relating to compounded drugs and their potential investigational or experimental status.

Although the long term benefits of this change are difficult to quantify because they focus on cost avoidance and general system process improvements, preauthorization review of the use of compounded drugs should result in a decrease in the use of compounded drugs over time. However, insurance carriers may also experience increased administrative costs associated with implementation of the proposed rule amendment.